Meaning of Marginal Costing - Meaning, Characteristics and Assumptions

Meaning of Marginal Costing

It is a costing technique where only variable cost or direct cost will be charged to the cost unit produced.

 

Marginal Cost of Production is the change in total cost that comes from making or producing one additional item. The purpose of this is to determine at what point an organization can achieve economies of scale.

Features of Marginal Costing

•  All operating costs are differentiated into fixed and variable costs.
• Variable cost is charged to the product and treated as product cost.
• Fixed Cost is treated as a period cost and written off to profit & loss account.
• In the marginal costing technique, the costs are recorded and profits are reported.
• The unit cost of a product means the average variable cost of manufacturing the product.
• Advantages of Marginal Costing

 

Elimination of cost variance per unit: Fixed costs are not carried forward to the next year, units have a standard cost. Cost comparisons become meaningful.

Accurate overhead recovery rate: This method eliminates large balances left in overhead control accounts. The problem of Under absorption and Over absorption does not arise.

Easy to understand: This costing technique is simple to understand and can be combined with other forms of costing like standard costing, etc.

Cost Control: Marginal Costing makes it easy to determine and control costs of production. As fixed cost is not included in the cost of production and hence there is no arbitrary apportionment of fixed costs.

Disadvantages of Marginal Costing

1.  The total costs cannot be easily segregated into fixed costs and variable costs.
2. Tax authorities do not accept the valuation of stock since the stock does not show the correct value.
3.  The elimination of fixed costs renders cost comparisons of jobs difficult.
4. The removal of fixed costs from the valuation of finished goods does not have any value, because fixed costs are incurred for the purpose of producing products.

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